Who is Afraid of the Big Black Swan ?

November 21, 2014

Not me ! I’ve got the Fed on my side, and if you will read on you will see why I feel so confident.

There is a well known saying in the stock market ” Don’t fight the Fed “. The reason for this is that the Fed uses interest rates to fight inflation and foster full employment, And, their fight can impact stock prices in a very significant way.

Inflation is not a threat at this point in time ( 2% is considered benign ), so the quest for full employment is at the top of the Fed’s “To do ” list. And, this is where the linkage to the stock market really starts.

Full employment needs employers who are sufficiently confident to expand operations. And that, in turn , depends on consumers acting with confidence. How to make the consumer confident ? You can make the consumer confident by creating the “wealth effect” which gives the consumer the confidence to increase spending.

How to create the ” wealth effect ” ? Easy. – lower interest rates to the point where the stock market is the only logical place to put money and lower interest rates to the point where housing activity begins to lift off. There is nothing like a rising stock market and increasing housing prices to make a consumer feel wealthy. It begins to feed on itself. And, once this phenomena begins to gain momentum, don’t get in the way

And, Europe and Japan are making it possible for the Fed to have even more of a free hand in its interest manipulation activity because Europe and Japan want to lower their own interest rates to head off deflation. If you step back you will see that money leaving the very low, but riskier, interest rate environments of Europe and Japan will end up allowing the Fed to keep rates low for a long time because this money will end up in New York and further depress the interest rate ( yield ) of our 10 year Treasury Note ( 2.34% ). All this can go on and on until our economy regains its strength and eventually overheats. Since it is starting at zero the Fed has plenty of time to sit on interest rates and create the wealth effect both in the stock market and in housing.

What all of this means to me is that I shouldn’t let temporary stock market dips of dubious sponsorship unhinge me. I should buy the dips until I see the economy beginning to overheat…indicating a black swan named “Inflation ” is about to float by. I’ll be watching the Fed standing watch.

These posts are being written for me , (with you privy to my thoughts ) to give me (and the rest of you newly minted IRA investors), the courage to withstand all the market gyrations by those intending to create trading opportunities for their own benefit..

Richard Maurice Gore

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